Ludwell DennyCHAPTER FOURTEEN
THE oil problem of the United States is acute. Industry and the army and navy are dependent on adequate future reserves. The demand is increasing. The supply is decreasing. Domestic resources under a competitive and wasteful system are being rapidly exhausted. Basic conservation is blocked by $11,000,000,000 of private capital controlling the industry. The Federal Government is not disposed to force drastic reforms upon private industry, and its constitutional power to do so is questioned. In the future the United States must depend increasingly upon foreign sources for essential commercial and military-naval supplies.
American acquisition of foreign reserves is blocked in many places by Great Britain. The British have been more successful than Americans in grabbing foreign fields. The British Government virtually excludes Americans from productive areas of the Empire. The British dominate the worlds remaining supply. They are conserving their reserve, while helping to drain American pools.
This situation produces a basic conflict between American and British companies and between the Washington and London Governments. That conflict is intensified by British Government ownership and direction of a company which is reaching out for territories flanking the Panama Canal. Oil is also drawing the Washington Government into dangerous disputes with Latin American, European, and Asiatic countries over property rights. But these manifold conflicts converge in the struggle between the United States and Britain over the worlds limited petroleum reserve as a determining weapon in their rivalry for commercial and naval supremacy.
In retaliation for Great Britains policy and position there is a growing demand that British companies be excluded from American fields. Already there are laws excluding foreign companies from American Government lands. But British penetration increases.
Discussing the unusual expansion in 1927 of the four large oil groups operating in the United States, the Wall Street Journal stated: With its usual foresight, the Royal Dutch-Shell group has been in the forefront of expansion. Through subsidiaries it financed, during 1927, $105,000,000 new money in this country at an average cost of around 5 per cent on long-term basis. All but $25,000,000 was for its American subsidiary, Shell Union Oil Company, so its integration efforts have been centred in the United States. Royal Dutch extended its pipe-line from St. Louis to Chicago, completed a modern refinery there and started to develop adjacent markets intensively. It has taken a big position in west Texas with gathering lines to radiate to numerous fields, tying into a trunk-line to pipe oil all the way into Chicago. Some $30,000,000 of new money is to be used for pipe-line development.261 In the period 1923-27 the network of trunk pipe-lines controlled by Dutch-Shell here is understood to have increased from less than 1,000 miles to 2,064 miles. Among its 1927 acquisitions was a 600-acre terminal on the Houston Ship Channel.
Dutch-Shells 1926 annual report showed that 35 per cent of its total world production came from the United States.262 This was a nominal decrease from 40 per cent in 1925, explained by the companys increased production in Venezuela. But actual Deterding production here rose in 1926, and further in 1927 to an acknowledged total of 42,300,000 barrels.
Dutch-Shell (Shell Union Oil and subsidiaries) led all other companies in production in the United States in 1924 and 1925, and was third in 1926, according to the Federal Trade Commission oil report of 1927.
As we have seen, Dutch-Shell in the two and a half year period ending June 30, 1926, increased its land holdings in this country over 500 per cent, acquiring in that time 1,352,643 acres mostly in unproven lands, according to the same authority. With a total acreage of 1,665,402, Dutch-Shell was the largest American land-owner in 1926 excepting only Standard of New Jersey, Gulf, and Texas. These production and ownership statistics for Dutch-Shell are based only on holdings reported to the Commission. No authoritative data are available for the increase in Dutch-Shell oil lands in the United States since June 30, 1926.
Foreign-controlled producing companies (chiefly Dutch-Shell) held 13.4 per cent of the total reported proven and unproven oil lands in June 1926, compared with 51 per cent held by Standard companies and 35.6 by Independents, according to the Commission. Concerning Dutch-Shell production, the Commission said:
In 1924 and 1925 the Shell Union Oil Corporation, controlled by the Royal Dutch-Shell combination, ranked first among all of the oil-producing companies of the country and in 1926 it was third. Its total production exceeded 40,000,000 barrels in each of those years. Its producing subsidiary and affiliated companies were the Shell Oil Company of California, the Roxana Petroleum Corporation, the Wolverine Oil Company and the Comar Oil Company. The Comar Oil Company is owned jointly by the Roxana Petroleum Corporation and the Marland Oil Company and it is operated by the Roxana.263
The importance of so-called unproven lands, of which Dutch-Shell acquired 1,349,320 acres in the two and a half years ending June 30, 1926, was stressed by the Commission: The holdings of unproven acreage indicate the activity of producing companies in attempting to discover new oil reserves. ... The holdings of certain companies lie largely in oil fields that have been producing for many years, while other companies have most of their acreage in the newer fields. Consequently the relative importance of different producing companies cannot be determined by the size of their holdings of proven oil lands. The existence of oil under unproven lands can be determined only by drilling oil wells. Many of the present highly productive oil pools were tested in the past and considered barren of oil, only to be drilled to a much greater depth at a later date and found to be highly productive.
Immediately following Standards published attacks on Dutch-Shell in connexion with Russian oil and the Indian sales strife, the Washington Government struck at the British trust. Secretary Wilbur appointed a special board of admirals to investigate how much United States navy royalty oil Dutch-Shell was getting, and to recommend legislation to stop such sales. Rear-Admiral H.H. Rousseau, chief of the Naval Oil Office and chairman of the investigating board, on March 26, 1928, testified at hearings of the House Naval Affairs Committee on this subject. As reported by the Washington United States Daily:
The only specific case of export traced, he said, was that of the Honolulu Consolidated Oil Company, of California, which has a lease on Reserve No. 2 at Buena Vista Hills. The production of this lease, he said, was between 250,000 and 300,000 barrels per month, and the Honolulu Company had made a contract with the Shell Company, of California, a subsidiary of the Royal Dutch-Shell Company, a foreign-controlled concern, for all the oil produced from this lease. This contract was the basis for the investigation now being conducted by a special board of the navy. ... He stated that a report on production of oil from Reserve Nos. 1 and 2 showed that 70 per cent of this production is used in California and neighbouring states, 15 per cent in the Atlantic States, and the remaining 15 per cent, or 300,000 barrels per month, goes into the export trade. ...
Acting-Chairman Britten asked Admiral Rousseau his views on the economic situation created when Great Britain, a year ago, sent the price of rubber sky-high. He asked:
'Why did the United States not counter by raising our petroleum prices, in view of the fact that we produce 72 per cent of the world production?
`I think thats what our oil men want, Admiral Rousseau replied.264
Army and navy officers are thoroughly alarmed by the prospect of inadequate supplies in event of war. They say Germanys defeat in the Great War was largely due to oil shortage. They quote Premier Clemenceaus appeal to President Wilson for American oil in 1917: The safety of the Allied nations is in the balance? They repeat the dictum of Lord Curzon: The Allies floated to victory on a wave of oil.265
President Coolidge reflected this alarm in his letter of December 19, 1924, constituting the Conservation Board. It is even probable, he said, that the supremacy of nations may be determined by the possession of available petroleum and its products.266
Mr. Henry L. Doherty, who characterized himself as the only member of the American Petroleum Institute who did not go on record that we had an abundance of petroleum, testified before the Conservation Board May 27, 1926: If we were to get into another war within three years, there is no assurance that we would have the petroleum necessary to carry us through that war without embarrassment.267 This large Independent producer described oil as our most important munition of war, and the only one that cant be conserved by a mere change of laws. He expressed particular concern that helium gas, an important war material, is wasted under the American system of producing natural gas. The United States is the only country which possesses enormous quantities of helium gas, he pointed out.
Following President Coolidges suggestion, the Conservation Board, which includes the War and Navy Secretaries, is devoting much time to the study of defence requirements. Confidential reports made by the Board cannot be quoted. But the nature of those studies is indicated by the Boards preliminary public report:
Under its constitutional power to provide for the common defence, the Federal Government should continue to make and execute plans for an adequate supply of petroleum for all military and naval needs of the future. Tank storage sufficient to meet initial demand should be built and maintained intact against war-time emergency. Underground reserves should be preserved to supplement the commercial supply as the next line of defence, and in the administration of these reserves of oil in the ground which form `an important part of the national insurance, future security, not present economy, should be the sole guiding principle.
Current peace-time requirements of those branches of the Government responsible for the national defence are approximately 20,000,000 barrels of petroleum products a year. These requirements are adequately provided for under the present normal rate of production. In case of war, the national defence requirements would, of course, immediately increase many-fold. This larger quantity would include the direct requirements, that is, the products actually used by the agencies of the Government engaged in national defence operations; and the indirect requirementsthe amount which will be needed industrially to carry out the munition program, or other similar programs of these agencies.
The production from oil wells within the boundaries of the United States at present is in excess of the estimated maximum requirements for national defence in time of war.
It is barely possible that future discoveries may reduce, or possibly entirely eliminate the need for petroleum fuels in the national defence. It is also conceivable that substitutes for mineral lubricants may be developed on a scale sufficient to meet major requirements. With the development of the Diesel engine and its adaptability to airplane and motor vehicle use, the military consumption of petroleum as fuel will be reduced per horse-power. ...
The war-time oil requirements of the navy in any overseas campaign would probably include the major portion of the whole deep-water tonnage under the United States flag. The increasing use of internal combustion engine-drives on commercial carriers makes liquid fuel more and more necessary for war-time water transport. The logistic services of the army and many of its combat weapons, such as tanks, tractor-drawn artillery, and airplanes, are dependent upon petroleum products for fuel and lubrication. Should the oil supply accessible to the United States become exhausted and no satisfactory liquid substitute be developed, it would be necessary to resort to coal for propulsion.
Our entire war-time reserve should not be in the form of refined products placed in tanks, for two reasons. First of all, the future needs of the army and navy for petroleum products may be in a ratio quite different from that of present use, and in view of the natural tendency of gasoline or even crude petroleum to waste when held in storage, a better policy is considered to be the storage of the higher grades of fuel oil or topped crude, from which the needed products could be derived.
Further, it is important that there should be an underground reserve in the event that our commercial supply becomes exhausted before that of other nations. This underground reserve should obviously not be drawn upon unless and until other sources become insufficient.268
Defence requirements, coupled with increasing industrial dependence upon petroleum products, put this Cabinet Board behind the State Departments support of Standard and other American companies in their struggle against the British Government and companies for foreign reserves. Its report stated:
While the production of oil upon our own territory is obviously of first importance, yet in failure of adequate supplies the imports of oil are of vast amount. The present imports from Latin American fields amount to about 62,000.000 barrels annually of crude oil, against which we export about 94,000,000 barrels of products. The fields of Mexico and South America are of large yield and much promising geologic oil structure is as yet undrilled.
That our companies should vigorously acquire and explore such fields is of first importance, not only as a source of future supply, but supply under control of our own citizens. Our experience with the exploitation of our consumers by foreign-controlled sources of rubber, nitrate, potash, and other raw materials should be sufficient warning as to what we may expect if we shall become dependent upon foreign nations for our oil supplies.269
President Coolidge in his United Press address April 25, 1927, re-emphasized this Governments policy of supporting private companies in the acquisition of foreign oil fields.
Our country consumes vast quantities of oil and gasoline in its use of automobiles, gas engines, and oil-burning furnaces, he said. If these products are to be kept within a reasonable price, which is very important to a great body of our citizens, our people who go abroad to develop new fields and to increase the supply ought to have the encouragement and support of our Government. ... The person and property of a citizen are a part of the general domain of the Nation, even when abroad. On the other hand, there is a distinct and binding obligation on the part of self-respecting governments to afford protection to the persons and property of their citizens, wherever they may be.270
The record of American oil diplomacy during the last decade shows that President Coolidge and his Conservation Board enunciated no new policy. Belligerent support of American oil companies abroad by the Wilson, Harding, and Coolidge Administrations indicates this is conceived as a fundamental and continuing policy.
Not that this diplomacy has accomplished much. Perhaps it cannot. Maybe the United States is too late as the British officials boast. Many neutral observers are of that opinion.
It seems little likely that the Americans will ever catch up the lead thus established by their British cousins, Anton Mohr wrote in 1925. Now that it is too late, they realize the weakness of their diplomacy, and also that they have too long allowed themselves to be blinded by the splendid sources of supply in their own country, with the result that they have omitted to take timely steps to secure control of foreign petroleum fields, and, through them, control of the worlds future production of oil.271 Perhaps, as a result of what a Fleet Street scribe calls determined but unostentatious enterprise in many directions, Great Britain can now contemplate with equanimity the oil battles of the future.
But if the American Government and companies are beaten, they do not know it. The struggle continues, and will continue. In Mexico there is only a temporary lull. In Central America our veiled exclusion policy is maintained with difficulty against native and British opposition. The London Government, through the Colombian concession plan, manoeuvres for strategic position dominating the Panama Canal. Hostile competition increases in Venezuela. The Mosul peace is an uneasy truce. The struggle in north Persia grows, with a Yankee named oil adviser to the Government and hatred flaming against the British. In Russia anything may happen. The sales battle between Standard and allied British companies in India is but part of attempted American penetration behind the Empires lines from Suez to Singapore. The front extends around the world.
The exploitation of petroleum has become controlled by companies sufficiently powerful to establish their own intelligence branches and sufficiently influential to advise their governments on questions of international policy; for their interests and the interests of the nation as a whole roughly coincide, said Sir Thomas H. Holland, of British oil fame, in a recent article on Conditions Affecting the Petroleum Prospects of the Empire.272
At first it was chiefly commercial rivalry between companies. Later the London Government was involved, then Washington. Now the British and American peoples are being aroused. In this country the old anti-trust crusade against Standard, and the Fall-Doheny-Sinclair scandals, put petroleum in bad odour. The public has been in no mood to champion the cause of any oil company at home or abroad. But this sentiment is changing.
The danger point will be reached when near-shortage drives prices upward, and American automobile-owners are told the British have cornered most of the world supply. Secretary Hoovers recent anti-British campaign because of the rubber monopoly,273 and the Administrations publicity drive against Great Britain during the Geneva Naval Conference, show how it is done. What will happen when the enraged force of public opinion is added to the commercial motives of the oil companies and the defence incentives of the Government? Then the Ku Kluxers and Mayor Thompsons may find a hate crusade crying for their hundred per cent leadership. Then all the other Anglo-American economic and political conflictsreal and imaginedcan be brought out and magnified.
If by ill fortune such a popular movement coincides with the anticipated scrapping of the Washington Naval Treaty, the international situation will be grave. The possibility is not remote of there being a new world tragedy over the petroleum dispute, says General Obregon.274
The danger cannot be removed by denying its existence. Peace cannot be maintained by repeating the lie that war between Great Britain and the United States is impossible.
War is possible. War is probableunless the two empires seek through mutual sacrifice to reconcile their many conflicting interests. This would involve sharing raw materials and markets, and dividing sea supremacy, without violating the rights of weaker nations. If some such miracle of diplomacy is achieved oil may cease to be an international explosive.
261. New York Wall Street Journal, Jan. 5, 1928.
262. London Times, June 9, 1927.
263. Federal Trade Commission, Prices, Profits, and Competition, supra, p. 30.
264. Washington United States Daily, March 27, 1928.
265. Cf., Chap. II.
266. Federal Oil Conservation Board, Report, Part I, September 1926, p. 1.
267. Federal Oil Conservation Board, Public Hearing, May 27, 1926, pp. 25 ff.
268. Federal Oil Conservation Board, Report, Part I, September 1926, pp. 22-24.
269. Ibid., p. 12.
270. New York Times, April 26, 1927.
271. Mohr, supra, p. 219.
272. London Journal of the Institution of Petroleum Technologists, October 1927.
273. Cf., Note No. 6.
274. New York Times, Nov. 28, 1927.